Academic journal article The Journal of Consumer Affairs

The Interplay between Advertising Disclosures and Financial Knowledge in Mutual Fund Investment Decisions

Academic journal article The Journal of Consumer Affairs

The Interplay between Advertising Disclosures and Financial Knowledge in Mutual Fund Investment Decisions

Article excerpt

This study examines the relationship between financial disclosures and investors' financial knowledge on investor decision making within the context of mutual fund advertising. Experimental results suggest that mutual fund ads with financial disclosures are more likely to generate higher levels of recall and positive thoughts regarding advertised information for the mutual fund, more favorable attitudes toward the mutual fund, and greater investment intention. Results also suggest that the impact of advertising disclosure on the outcomes of financial behavior (e.g., recall, cognitive response, attitude toward mutual fund, and investment intention) can be moderated by the level of an investor's financial knowledge. Investors with low financial knowledge were likely to systematically process advertising claims and generate more attribute-related thoughts regarding the advertised mutual fund when exposed to advertising disclosures while advertising disclosures had an insignificant effect on attribute-related thoughts among investors with high financial knowledge.

MUTUAL FUND ADVERTISING DISCLOSURES

In an effort to enhance investors' economic decision making and to increase financial literacy in the marketplace, state and federal governments require mutual fund companies to provide disclosures within mutual fund advertising (Federal Registrar 2003; Hoy and Lewin 2007). With the importance and growth of individual investment and financial management, consumer groups as well as policy makers have suggested that financial companies should provide advertising disclosures that could assist investors' information processing (Stewart and Martin 2004). Research suggests that there are occasions where financial customers, bombarded with information, are more likely to allocate cognitive capacity to processing irrelevant, unclear, and/or inaccurate data due to information overload (Lee and Cho 2005) whereas information disclosures can help consumers more easily notice and process necessary information (Kozup and Hogarth 2008). According to Bone's (2008) model of consumer empowerment and welfare, advertising disclosures can increase the consumers' likelihood of detecting and resolving a mistake or predatory practice of financial marketers, thus facilitating the information exchange between buyers and sellers.

By definition, advertising disclosures are a class of regulatory actions to ensure that consumers are informed about product characteristics that may be integral to their decision to purchase and use a given product (Stewart and Martin 2004). Disclosures in advertising take on a variety of forms that include provision of basic information about product characteristics, qualifications of product claims, risks of product usage, admonitions or recommendations about product purchase and/or use, and information about reducing or avoiding risks, as well as corrective advertising (Hoy and Lewin 2007). In particular, as the recent economic crisis has unfolded with liquidity shortfalls and bankruptcy in the US financial market system, advertising disclosure is expected to serve as a communication approach that can alter consumers' knowledge and perceptions regarding financial behavior, which may enhance the efficiency of information flow in the financial marketplace (Bone 2008; Kozup and Hogarth 2008).

Against this backdrop, in order to provide guidance to mutual fund companies and thereby facilitate more effective financial disclosures in advertising, the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC) developed and provided guidelines about the required types and acceptable standards for affirmative disclosures in policy statements and orders. Specifically, the FTC views advertising disclosures as information remedies that can reduce potential advertising deception or unfairness (Hoy and Lewin 2007). Under the FTC's unfairness authority and deception jurisdiction, the SEC issues and enforces trade regulations that pertain to ad claims and disclosures for all mutual fund products (Stewart and Martin 2004). …

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